When you buy a London flat, you're not really becoming an owner

The weird reality of leaseholds.

Instead of buying a property, how about renting one? Only this will be a rental deal with a difference: I am going to make you sign a 100-year contract and demand that you pay the vast majority of the rent upfront. If any repairs need doing, of course I’ll arrange them for you. But I’m going to send you the bill.

You want to argue? If you don’t pay, I am going to rip up the rental contract and you are going to lose all that money you
paid upfront.

Does that sound appealing? It is really just another way of describing leasehold, the form of property "ownership" which is almost universal in apartment buildings in England and yet hardly exists elsewhere on Earth. London boasts some of the world’s highest property prices, and yet many buyers are only vaguely aware that when they buy a flat — whether for £200,000 or £20m — they are not really becoming property owners at all. "But I am the owner," one buyer recently protested to me after seeing himself described as a "tenant" in his deeds. Oh no you’re not, I had to tell him. You’ve got 125 years of happy renting ahead of you.

Leasehold is the basis of some of the largest private fortunes in Britain. The Duke of Westminster would be just another hard-up English aristocrat had his forbears sold off the freeholds of the properties built on their estate 200 years ago. Selling leases instead enabled the Grosvenor family to take money from the sales and yet continue to retain an interest in hundreds of properties in a prime central London residential district.

Yet leasehold seems increasingly incongruous with the present-day London property market. Billionaires, the representatives of global capitalism, can find themselves the tenants of English aristocrats, or quite possibly the tenants of a fly-by-night company operating from above a chip shop in north London. Freeholds are sometimes worth much less than the value of individual flats, with the result they can end up in the hands of small-time property barons with devious ways of squeezing money from their tenants.

Like all landlord-tenant relationships, that between freeholder and leaseholder is apt to go horribly wrong. And it isn’t just a case of people on the lowest rung of home ownership who find themselves being exploited by unscrupulous landlords. You can find hornets’ nests of anger and resentment in some of the poshest addresses in London.

In one case in Knightsbridge, flat-owners were each sent a demand for £14,000 for "major works" to the roof. If you totted up the contributions which had been asked of all leaseholders, it came to an astronomical sum way beyond anything which might reasonably have been spent on repairing a roof. What the money was really for, the leaseholders later found out, was building an extra two flats on the roof — which the freeholder was then going to sell entirely for his own benefit.

Most disputes between leaseholders and freeholders are for the same reason: excessive service charges. It is all too easy for freeholders to jack up the cost of repairs: add 15 per cent here and 20 per cent there. In some cases the costs end up being ridiculous: the tenant of a one-bedroom flat in Oxford ended up paying £9,300 a year. The value of the flat, as a result of the service charges, had fallen to just £15,000.

But in most cases of excessive charging, fees are pushed up to a level at which the leaseholder might groan yet not be quite moved to complain. Typical is the block of flats where leaseholders found 33 per cent was being added to their building insurance. How would you know you were being overcharged, without shopping around for insurance yourself?

Landlords are not supposed to exploit their leaseholders, and there are provisions in law to prevent them doing so. Leasehold Valuation Tribunals exist in order to settle disputes between the two parties. But in practice few leaseholders get round to challenging excessive charges; indeed, the process of doing so is itself expensive. Most quietly pay up or sell up, knowing that if they kick up a stink it will make it more difficult for them to sell their property.

The Leasehold and Commonhold Reform Act 2002 seemed initially to ring the death knell for leasehold. It enhanced powers that leaseholders already enjoyed: to exercise their collective right to buy the freehold of the buildings in which their flats are situated. In addition, it created a new form of tenure — commonhold — much more like the condominiums common in the US and many other countries. Under commonhold, owners of individual flats would jointly own the entire building. A decade on from the Act, there are still only a dozen commonhold developments in England.

Nor has there been any great uptake of enhanced powers of ‘enfranchisement’ — a term used to describe the joint purchase of a freehold by the leaseholders. One of the reasons for this is that it can take an extraordinary effort to gather the leaseholders and persuade them to agree to exercise their rights. The law requires at least 50 per cent of leaseholders to agree to the action. Knocking on doors is rarely successful: in a typical London block a large number of the leaseholders do not live in their flats. To contact them it may be necessary to trawl through the Land Registry. And even then it is quite likely that you will find flats that are owned by companies registered abroad.

Leaseholders who want to buy their way out of the system have to be prepared for a long and expensive battle: under the rules, leaseholders are liable to pay the landlord’s legal costs as well as their own. In one recent case in east London leaseholders succeeded in buying their freehold for £404,000, after suffering years of exaggerated service charges. The overcharging wasn’t quite finished, though: they found themselves having to pay another £169,000 in legal costs.

It is inertia that keeps leasehold going. Perhaps the London property boom will carry on for so long that buyers won’t worry too much about it. When you expect to make tens if not hundreds of thousands of pounds on the value of your lease, you might not care about a service charge that that is hundreds of pounds too high. It might be a different story if prices began to slide and owners were suddenly faced with the prospect of losing money. They might then begin to see themselves for what they really are: just like other tenants, paying through the nose to keep their landlord in fine wine.